Fed Keeps Key Rate at Record Low

By Sadie Bass

Mar 16, 2010 6:43pm

ABC's Matthew Jaffe reports from Washington: The Federal Reserve today decided to keep a key federal interest rate at a record-low level for “an extended period”. Back in December 2008, only months after the financial meltdown, the central bank slashed the federal funds rate – what banks pay for overnight loans – down to 0-0.25 percent. In recent weeks there had been speculation that the Fed might signal an upcoming rate increase in this month’s statement, but that did not happen. Still, there were clues that the Fed is becoming more confident about the country’s economic recovery. First, the Fed sounded more optimistic about the battered jobs market. “Economic activity has continued to strengthen and the labor market is stabilizing,” the Fed said. Not only that, but “business spending on equipment and software has risen significantly” and “household spending is expanding at a moderate rate.” Since consumer spending accounts for over two-thirds of economic growth, any boost in spending could be crucial: if consumers start opening their wallets, then businesses start making money and hiring new employees. Another sign that the Fed could be gaining confidence about the economic recovery is that the central bank today reiterated its plan to stop snapping up mortgage-backed securities at the end of this month. To date the Fed has bought $1.25 trillion of these assets, but that support is now coming to an end. Not surprisingly the market liked the Fed’s decision to keep its key rate at a record low, with the S&P this afternoon closing at a 17-month high. But the Fed today was not completely bullish about the country’s economic recovery. “Investment in non-residential structures is declining, housing starts have been flat at a depressed level, and employers remain reluctant to add to payrolls,” the Fed said.  Tomorrow we’ll hear more about the central bank’s economic outlook when Ben Bernanke testifies on Capitol Hill at 2pm. View the full Fed statement HERE.

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